Car finance can be a tricky business. While the market is booming today thanks to the efforts of automobile companies, it is actually the impetus provided by car financing institutions which has made automobiles so affordable to middle class India.
There are however some restrictions. While most financiers are today offering interest rates between 10.75 to 12.50 per cent, it would augur well to remember that finance rates are flexible within a certain percentage and in most cases; your bargaining prowess will help you see lower rates. Most banks and financial institutions also give you benefits provided you have some sort of a prior financial relationship with them, which could be a credit card, an account with the bank or even a loan taken previously. However, interest rates on used cars are certainly higher by upto as much as one to three per cent depending on the financier and there are very few who do imported cars, and that too bonded ones only.
To understand car finance, we need to understand what the different terms mean.
Hire Purchase: This is an agreement whereby a car is let on hire and under which the hirer has an option to purchase the car in accordance with the terms of the agreement.
Under a typical finance (loan) scheme, the different types of finance are:
Advance EMI Scheme: In this scheme the customer pays the down payment and one equated monthly installment at the beginning of the loan. The balance EMIs are paid at the start of subsequent months through post-dated cheques.
Security Deposit Scheme: Under this scheme a customer gets 100 per cent of the invoice value of the car as the finance amount. The financier requires keeping a security deposit between a range of 15 per cent to 35 per cent of finance amount. Through finance tenure, a security deposit earns a quarterly interest ranging from 14 per cent simple to 14 per cent compounded. One EMI is to be paid initially and the balance EMIs are paid at the start of subsequent months through post dated cheques. At the end of the finance tenure, the security deposit along with the interest earned on this deposit is refunded to the customer.
Balloon Payment Scheme: The loan package is structured in such a way that you pay a lower sum as installments and at the end of a fixed period, you pay a lump sum amount. The financier will fund between 50 - 90per cent of the cost of the vehicle depending on your credit evaluation. The tenure of the scheme can range from two years to five years.
Step Down Scheme: This is a scheme that facilitates higher initial payments, and reduces the amount towards the latter part of the finance tenure, thus decreasing the finance burden. This scheme is very suitable for customers who have a lump sum amount in hand today and who desire a comfortable repayment pattern in the future. Currently, very few banks are giving this scheme.
Not everything is hunky-dory though. What most companies do not mention, is that they charge a two to three per cent foreclosure charge on early payment.
This is an option, which till as recent as 2012, was not available in India for private individuals. However, with people’s penchant now to own cars hassle-free and to change every 3 years, a lot of banks are getting into individual leasing. But what exactly is leasing?
In a lease, the financier leases out a car to you for a certain time-period, after which the financier can either take back the car or sell the car to a third party. In effect, you will not be the owner of the car either during the tenure of the lease or even after the lease has been terminated. This is the technical definition of a lease and you may come across several variants depending on the financier you are dealing with.
In the case of individuals, an individual can opt for a 3-year lease at the moment for 50 per cent of the car’s cost. He has to return the car at the end of 3 years, and if he chooses to retain the car then he has to pay the balance amount as per book value. Currently, leasing happens at around 11 per cent interest rate, but in this case the lease amount includes the on-road price of the car like road-tax and insurance for 3 years.
To get a car loan successfully, for the tenure and down payment you want, it is imperative that you keep a track of what is known as a ‘CIBIL’ score. CIBIL stands for Credit Information Bureau India Limited, and is basically a repository of information which has been pooled in by all banks and lending institutions operating in India. Presently this is a database size of over 170 million consumer records and 6.5 million company records contributed by our over 500 Members. Any loan you apply for will go through a CIBIL check, so make sure that you have been regularly repaying your other loans and your credit card bills. If you want to understand what your credit rating is, simply go onto the CIBIL site and order your credit rating score.
Whichever option you go for and no matter what loan you avail from what bank, keep your credit rating clean by ensuring you can repay the loan. Today, you can avail an auto loan for upto 84 months, but choose wisely or else you might get tired of just paying installments!